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Inequitable liability

07 July 2009 / Mike Truman
Issue: 4213 / Categories: Comment & Analysis , equitable liability , Admin
The plan to abolish equitable liability is plain wrong, says MIKE TRUMAN


  • The removal of equitable liability is unfair.
  • Not dependent on Crown preference or pre-SA rules.
  • Could be retained by statutory instrument.
  • Taxation will campaign to retain it.

What is the opposite of fair play? Unfair play. What is the opposite of a logical approach? An illogical approach.

What is the opposite of equitable liability? Inequitable liability.

So why on earth is HMRC planning to abolish the practice of equitable liability, when it means that they will be collecting tax that should not be due?

What is equitable liability?

Not everyone will necessarily have had to use the ‘get out of jail free’ card that is equitable liability, but we have had articles recently about it in Taxation from TaxAid, in particular Is it equitable? by Arthur Hook.

Equitable liability is best defined in the item that appeared in the August 1995 Tax Bulletin, which is the last time that the then Inland Revenue set out its practice in full, explicitly because it was not as well known as the Revenue thought it should be.

Having explained how an assessment could (under the rules that applied at the time) become final, the article continued:

‘However, where the taxpayer has exhausted all other possible remedies, the Inland Revenue may, depending on the circumstances of the particular case, be prepared not to pursue its legal right to recovery for the full amount where it would be unconscionable to insist on collecting the full amount of tax assessed and legally due.’

There are various conditions for the relief to be applied, the most important of which is that the taxpayer has to show what the true liability to tax would have been.

Crucially, however, the application of equitable liability is not linked to ability to pay, nor is it linked to any concept of having acted reasonably.

The principle originated when tax debts were subject to Crown preference, so that if they were overstated other creditors were particularly badly affected.

It also came from the time when, in theory, failing to appeal an estimated assessment within 30 days could mean that it was final and indisputable.

However, the practice survived well past the abolition of both, and was specifically extended after the introduction of self assessment, although with recognition that it was likely to be used less once the submission of a tax return within five years of the filing deadline could replace a determination.

It survived because it was a backstop, to be used when all else failed, a way of getting the liability of taxpayers, who (for one reason or another) had not kept their affairs in order, back down to what it should be.

The Wilkinson review

As the window for filing late returns is about to drop to three years from April 2010, you might think that equitable liability would become more important again.

Instead, hidden in one of the supplementary documents issued with the budget was a statement that the concession was one of those to be withdrawn after the review following the case of R v HM Commissioners of Inland Revenue ex p Wilkinson [2005] UKHL 30.

In this case, Mr Wilkinson claimed a tax deduction for widowers’ bereavement allowance.

On being told that there was no such thing, he pointed out that there was (at that time) a widows’ bereavement allowance; that not to provide an equivalent for widowers was discriminatory; and that HMRC could use their care and management powers under TMA 1970, s 1 to effectively create one by extra-statutory concession.

In refusing his appeal, the House of Lords made comments suggesting that the powers of HMRC to make concessions were more limited than had otherwise been thought.

After a long time when nothing seemed to happen, FA 2008, s 160 allowed for the continuation of existing concessions by statutory instrument, and the aforementioned review was published.

The review pointed out that not all the concessions were included in the official booklet of ESCs (including equitable liability, which was not generally seen as a concession but as a practice).

Many concessions were considered to be still within the powers of HMRC, others have already or will in future be legislated. However, ten were identified for abolition, mainly because they were either little-used or obsolete.

It appears that equitable liability was considered obsolete, because the two main reasons for introducing it (Crown preference and estimated assessments) were no longer valid.

Unconscionable to collect

This is to completely miss the point of equitable liability. The key word in the definition of it quoted earlier is that it would be ‘unconscionable’ to collect the full tax that is legally due.

The withdrawal of equitable liability is a deliberate decision to collect tax in situations where it is unconscionable to do so; where the tax collected bears no relation at all to the correct amount due, even though the true liability is no longer disputed.

Arthur Hook’s article points out that TaxAid regularly advises clients where the true income is not only significantly lower than the amount in the determination, it is also lower than their personal allowance.

However, whether because of ignorance, health problems, or just plain ‘brown envelope phobia’ they have not submitted returns, and Debt Management are looking to enforce the amounts shown on determinations.

Once the time limit passes for displacing these, the only way out is equitable liability.

So, to put it bluntly, we are talking about HMRC, knowing that a taxpayer should not actually have had any liability to tax at all, insisting on the payment of thousands, or even tens of thousands, of pounds of tax.

Taxpayers could find themselves bankrupted to pay a tax debt which should never have been due, and which was in any case no more than a guess made by an Inspector with no information. If there ever was a practice which cried out to be described as ‘unconscionable’, this surely is it.

HMRC reaction

It is not, therefore, surprising that there has been a great deal of criticism. Keith Gordon, the Taxation Awards CTA of the Year, has recounted his discussions with HMRC on his blog, and has given his trenchant views on AccountingWeb.

I understand that the protests have caught HMRC rather by surprise. They genuinely considered that this was an unexceptional issue, and that the removal of the concession would not be controversial. They have since offered discussions about the ‘impact of the withdrawal’.

However, Keith’s blog confirms that they are ‘not intending to retain the concession’. They have accepted that there may be a ‘small number of exceptional cases’ where reasonable excuse means that the failure to make the return in time allows them to accept the late information and adjust the return accordingly, but that is all.

There are two reasons why HMRC may be taking this approach. The first is that they believe they are bound to, because of Wilkinson. If so, then it seems to me that they are entirely wrong.

FA 2008, s 160, to which I have already referred, gives the Treasury the power to give effect to ‘any existing HMRC concession’.

That is defined as a pre-existent statement from the Commissioners that there would be a reduction in, or any other concession in relation to, a tax or duty. Subsection 3 goes on to define ‘statement’ widely, to include interpretations and decisions or statements made ‘in any other way’.

So all that the Treasury need to do is to enact the discretion for HMRC to remit tax in the situations where equitable liability was previously applied.

The other reason they may be taking this approach would be that HMRC do not consider equitable liability to be an appropriate or acceptable practice. It is certainly possible to see how it could potentially be misused.

A taxpayer could simply be entirely cavalier about his tax liabilities, deliberately refusing to ‘join the system’ in the hope that he would be overlooked, and then when bankruptcy threatened apply for equitable liability.

What, however, this overlooks is that equitable liability has always allowed HMRC to ‘have regard to all the relevant circumstances of the case’.

In particular, it might be appropriate in such cases to adjust the tax to the amount which would have been paid if the evidence had been provided in time, but to then apply penalties and interest to reflect the deliberate failure to make returns.

It seems to me that the power to do so is already present in the discretion which is part of equitable liability, but if it is felt that this is difficult to legislate, it would be possible to build the power to apply interest and penalties into the statutory instrument. 

The Taxation campaign

What is not acceptable is the idea that taxpayers who, however unreasonably, have failed to keep their tax affairs up to date, should continue to be pursued for vastly excessive and disproportionate tax liabilities even when they have provided clear evidence to HMRC that the determined tax was excessive.

We only have until next April to ensure that this concession is retained, so Taxation is joining the fight to do so, and will campaign on the issue until we get a commitment from ministers that the essential elements of equitable liability will be retained. HMRC will not collect tax when it is unconscionable to do so.

As a first step we would urge readers to ‘sign’ Keith Gordon’s e-petition, the link to which can be found from his blog. We would also urge you to send us your examples of cases where you have had to use equitable liability in order to get a fair outcome for your clients.

Please email them direct to me, letting me know whether or not we can make them public in the magazine and on our website, or whether they are only to be used as examples in discussions.

We will pass all examples on to the tax representative bodies as they continue the negotiations with HMRC, so make any changes that are necessary for client confidentiality before sending them to us.

I hope that ministers will see sense, and quickly nip this issue in the bud.

If not, we will be looking to develop our campaign in future weeks and months, and to support those like Keith and AccountingWeb who are already campaigning on this issue.

Watch this space!

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